Tuesday, June 28, 2011

Finance Minister Jim Flaherty on Sunday urged Canadians to tread carefully when taking on long-term debt like mortgages, warning that interest rates are sure to rebound.

"We are cautioning people not to assume too much long-term debt on the assumption that interest rates will stay as low as they are -- because they won't," Flaherty said Sunday on CTV's Question Period.

"We want to make sure Canadian households plan ahead and know, if they renew a mortgage in the next several years, it's likely that the interest rate will be higher," he added.

"Interest rates have nowhere to go but up."

Flaherty's remarks echo those of a Bank of Canada report last week that said high household debt is now the most significant risk to the Canadian economy.

The report came one day after Statistics Canada noted that "rock-bottom" interest rates are luring more Canadians deeper into debt. The ratio of household debt rose to 149.47 per cent in the first quarter of 2011, meaning Canadians owe $1.49 for every after-tax dollar they earn.

Statistics Canada also said Canadian debt ratios are "leaving their U.S. counterparts in the rear-view mirror, despite the repeated exhortations by domestic policymakers to rein in borrowing."

Flaherty warned that Canada and other countries could be hurt unless more is done to help the ailing economy of Greece.

"We think there is a danger of contagion if there is a failure in Greece," said Flaherty, noting that its money troubles could spread to banks elsewhere in the EU, leading to a credit crisis similar to that of 2007.

Flaherty said protecting the European and, by extension, world economies would probably require "a substantial package" for Greece from the EU and IMF.

Closer to home the minister added that the runaway debt and deficit in the U.S. is also a "serious concern" that needs to be addressed before the next presidential election in order to restore confidence in the U.S. economy.

Despite the uncertainties in the global economy, Flaherty said the government's plan to eliminate the federal deficit within three years is still "on track."

"We do expect some softening in growth the latter part of this year," he said, "but overall for this year we're exactly where we should be."

Before beginning today’s market commentary I want to thank Serge Berger for his insightful analysis and comments on the market during my vacation. Serge was so well received his articles will continue to appear in the Daily Trader’s Alert.

My recent vacation to celebrate my 50th wedding anniversary took my wife and me to several European capitals that have been recently in the news. While there, I took the opportunity to chat with average citizens (cab drivers, hotel employees, etc.) about their general outlook toward the European community’s problems.

In Athens we arrived two days after the police crackdown at Constitution Square and saw the many placards and signs demanding reforms. And like the demonstrations in Rome at Pantheon Square, where we stayed for three days, a trade union supported by the Communist Party did most of the marching, demanding even more liberal reforms.

Much of what we saw and heard confirmed that politicians in all countries find it almost impossible to take back what they have given. Many average folks would rather go back to their old currency. As one cabby put it, “Before the euro a loaf of bread cost half a euro, equivalent in lira, now it costs a full euro.” We concluded that politicians will most likely give in to the demands of the masses despite the need for drastic cutbacks in spending.

In Rome, since Piazza Pantheon is situated very close to many government offices, we were amused to see what appeared to be minor government officials being chauffeured daily in their black Lancias and BMWs. Those with the sticker “Public Service Official” (rough translation) on the windshield received special police escorts and often backed up traffic to allow them to park at favored spots or cut through lines of traffic.

“Some pigs are more equal than others,” to coin a phrase from George Orwell’s Animal Farm.

Conclusion: Despite encouraging words from senior European leaders, the chances are that the established system of giveaways that is part of European political life will continue and so will their debt crisis. Just as we departed Rome the newspapers were carrying the story of Moody’s threat to downgrade 16 Italian banks.

On Friday the S&P 500 closed lower for the seventh time in eight weeks. But despite the selling pressure the important support zone at 1,250 to 1,260 appears to have held again, and on Thursday the 200-day moving average (red line) rebuffed the sellers for the second time in six sessions. But the tone of the market is ominous as money is seeking a safe haven. On Friday the 3-month Treasury Bill Yield fell to .01% for the second time this year.

Major support lines can hold for two times but a third or fourth attack usually results in a breakdown. The moment of truth will likely occur soon since the 20-day moving average (green line), now at 1,290 is falling rapidly and is squeezing prices against the 200-day moving average–a major support line which if broken would most likely plunge the index through the black support zone, as well. Friday’s stochastic indicator flashed a warning signal and will issue a clear sell signal if its “fast line” (red) turns sharply lower with a cross of the blue line through the red. A rally that holds above the 20-day moving average at 1,290 and the recent high close to 1,300 is needed to reverse the current threat of a breakdown.

Perhaps the most influential key sector in the overall market decline has been the Financial Sector, as measured by the Financial Select SPDR ETF (NYSE:XLF). And on Friday that group again led the market lower.

Currently the index is trading within a major support zone at just over 14.50 to just under 15. Looking back the sharp decline in May resulted in a crossing of the 200-day moving average (red line) by the 50-day moving average (blue line). This unfavorable signal bears the ominous title of “Death Cross” since many technicians interpret this as a very bearish sign. There is little evidence to show that the cross has much long-term meaning, but there is much evidence of shorter term significance. I’m inclined to give significance to it only if it is accompanied by other negative signals like the Stochastic Sell signal issued on Friday. The trend for the XLF is down and a break through the major support zone could have major impact on the overall stock market. In order for the XLF to reverse the negative indicators, it would have to close above the recent double top at around 15.20. This index should be closely monitored as an advance indicator of a future overall market direction.

As a result of Europe’s financial problems there has been a mini flight to the dollar. And on Thursday, the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP) broke through its bearish resistance line on an intraday high and followed it with a closing break through a wedge on Friday. This is a near-term bullish signal for the dollar but a short-term negative for stocks and commodities . In order for UUP to confirm that a long-term trend reversal has occurred, it needs to close above the May high at $21.86.

Conclusion: The shorter-term direction of the market turned bearish when the S&P 500 closed under its intermediate trend line in May. Now the evidence is growing that the long-term trend is under attack. But despite the negative overtones there is not enough evidence to say that we are entering a bear market. We’ll let the market tell us of its future direction and the charts included with today’s market outlook should help to focus us on the prime market movers.

While he dislikes owning gold shares at the moment, Jim Cramer is bullish on the gold bullion. In his latest Lightning Round session of Mad Money Program, he recommended purchasing GLD ETF at $140 (5% below current prices). He forecasts prices will come down a little as people see no inflation and the fact that oil is also coming down and a stronger green back is bad for gold. "but gold has gone inexorably up...buy more at $140. Gold is a currency and not a commodity."

Are you familiar with Robert Kiyosaki? He is best known for the "Rich Dad, Poor Dad" series of books. Over 26 million books authored by Kiyosaki have been sold and he is recognized as a financial expert by millions of people across the globe. Well, guess what? Even Robert Kiyosaki is warning that an economic collapse is coming. In fact, Kiyosaki and his team of financial experts are encouraging Americans to stock up on food, guns and precious metals. This is yet another sign of just how close we are to the total collapse of the U.S. Economy. Kiyosaki, who once co-authored a book with Donald Trump entitled "Why We Want You To Be Rich" is now a full-fledged prepper. As even more prominent Americans start warning that an "economic collapse" is coming do you think that the American people will finally wake up and start paying attention?

The statements that Robert Kiyosaki makes in the video posted below are absolutely jaw-dropping. Once upon a time he was all about teaching people how they could get rich, but now he is talking about storing food, buying guns, investing in precious metals and preparing for the coming crash.

The following are 11 of the best Kiyosaki "sound bites" from the video below....

#1 "when the economy crashes as we predict"

#2 "the crowds come rushing in to buy gold and silver"

#3 "we could either go into a depression or we go to hyperinflation"

#4 "or we could also go to war"

#5 "buy a gun"

#6 "I'm preparing"

#7 "I'm prepared for the worst"

#8 "so come to my house and I'm armed and dangerous and I'll welcome you"

#9 "we have food, we have water, we have guns, gold and silver, and cash"

#10 "the credit card system shuts down, the world shuts down"

#11 "the supermarkets have less than 3 days supply"

If you have not seen this video yet, it is definitely worth the 8 minutes that it takes to watch it. Robert Kiyosaki seems to be extremely alarmed about the future of the U.S. economy....

It certainly seems as though the entire financial culture in America is changing.

Once upon a time everyone wanted to know how to get rich.

Now everyone wants to know how to survive the collapse that is coming.

As I have written about previously, even people like Tony Robbins and Donald Trump are warning that an economic collapse is coming.

Economic pessimism is seemingly everywhere and almost every recent survey indicates that the American people are losing faith in the U.S. economy.

For example, in a recent article I noted that 48 percent of Americans believe that it is likely thatanother great Depression will begin within the next 12 months.

According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%. Back in 2007, just 14% of Americans lacked confidence in U.S. banks.

In order for society to function correctly, people need to be able to trust each other and they need to be able to trust the major institutions that hold society together.

Once confidence in our major societal institutions is gone, it is going to be incredibly difficult to get it back.

Sadly, the reality is that many of our major financial institutions have been untrustworthy for a very long time. It is just that the American people are only just now starting to wake up to that fact.

For example, the Federal Reserve has been at the heart of our economic problems for decades but most Americans have not realized it.

But now that is starting to change. According to one recent poll, only 30% of Americans currently view Federal Reserve Chairman Ben Bernanke favorably.

The American people are becoming increasingly dissatisfied with an economic system where the vast majority of the rewards flow to Wall Street, the big banks, the biggest corporations and the ultra-wealthy.

According to the Washington Post, the top 0.1% of all income earners in the United States took home 2.6% of the nation's earnings in 1975. By 2008, the top 0.1% were taking home 10.4% of the nation's earnings.

The Washington Postalso says that after adjusting for inflation, the average income of the top 0.1% of all Americans jumped by 385 percent between 1970 and 2008 while the average income for the bottom 90 percent of all Americans actually fell by one percent.

The sad truth is that income inequality in the United States has become a major problem. A very small sliver of the population is reaping almost all of the rewards and the middle class is being ripped to shreds. Conservatives, liberals, Democrats, Republicans and libertarians should all be alarmed by this.

Every single minute we steal another 2 million dollars away from our children and our grandchildren.

But if we stop this theft it would throw the U.S. economy into a horrible economic crisis that would be far worse than what we are experiencing right now.

That is why the vast majority of our politicians do not have the guts to do it.

We truly are caught between a rock and a hard place.

But people like Robert Kiyosaki can see what is coming, and they are getting prepared.

Are you prepared?

Many of our young people have come up with their own versions of an "economic stimulus plan". In past articles I have documented many of the signs that society is collapsing, including the disturbing rise of the "mob robbery" phenomenon.

Well, just the other day there was another very shocking mob robbery in the city of Philadelphia.

Eurozone sovereign debt yields pushed higher across the board today. Irish debt has topped 12% for the first time, Italian debt topped 5% and most Euroland debt yields are at all times high spreads compared to Germany.

Significantly, yields are at fresh new highs for Spain, Italy, Ireland and Portugal.

If by any chance you are wondering whether to believe EU officials or the bond markets, I suggest you believe the bond markets.

The charts below are delayed, but the quotes are accurate. Stress increases in Eurozone.

Spain 10-Year Government Bond Yield

Portugal 10-Year Government Bond Yield

Italy 10-Year Government Bond Yield

Ireland 10-Year Government Bond Yield

Greece 10-Year Government Bond Yield

Greece 2-Year Government Bond Yield

If EU and ECB officials thought they solved something with their Greek bailout maneuvers, the bond market disagrees and so do I.

I think it’s one of the great profit opportunities available right now and I’ll explain why. The announcement that Germany’s going to close down all 17 of their nuclear facilities in the next 11 years made the biggest headlines that you could imagine. It was almost semi-hysterical. It ignited the greens to a glorious glee and, to be honest, seven of those 17 facilities are old and they should have been closed down long ago but in terms of them getting out of nuclear power the headlines almost mentioned Switzerland and Italy getting away from nuclear power and Japan of course. But the press didn’t even seem to mention or even notice that at the same time the Saudi’s announced that they’re going to build 16 nuclear plants. Also, there’s no mention of India’s plans. They’ve got over 20 percent of its population that has no electricity at all and has just announced an eight fold—that’s eight times the expansion of their nuclear in the next ten years. That’s not to mention more atomic power announcements from Taiwan and Brazil and the Ukraine, even Slovenia and Poland. So there is a massive worldwide movement toward nuclear power but the prejudice by the world against nuclear is profound. That’s when you can make money when you get in touch with reality and you have a chance to buy some of these stocks that are beaten down.

When the anti-nuclear—cheering the end of nuclear dies down somebody’s going to ask what might replace it—nuclear power—dirty coal, natural gas dependent on Russia’s good will and vulnerable to cyclically higher gas prices, oil possibly cut back by the current revolutionary unrest by oil producers, and do those who answer that wind power could replace nuclear—do they know what rare earths are? That you need 700 pounds for each turbine and around 95 percent of the rare earths come from China. They just this week announced—China—that the Mi Ti just announced that they’re building their own strategic stockpile of rare earths so even a trickle of the five percent might get cut off. You know the choice is not uranium, is not nuclear or wind turbines, its uranium plus shivering in the dark.

Are uranium stocks finally starting to form a bottom? It’s a bit too early to tell for sure, but if your holding period is multiple years, an accumulation of uranium stocks at these prices sure looks interesting.

China's first audit of local government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of last year and warned of repayment risks, including a reliance on land sales.

Financing vehicles set up by regional authorities already had more than 8 billion yuan in overdue debt, while more than 5 percent of such companies used new bank borrowing to repay loans, according to the audit, posted on the National Audit Office's website and submitted to China's cabinet.

"Some local government financing platforms' management is irregular, and their profitability and ability to pay their debt is quite weak," Liu Jiayi, the country's auditor-general said in speech published today.

Premier Wen Jiabao ordered the first audit of local-government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt. As much as 30 percent of bank loans are expected to turn sour and they are likely to be the biggest source of non-performing assets for the industry, Standard & Poor's said in April.

Local governments, barred from selling bonds or borrowing directly from banks, had set up 6,576 financing vehicles by the end of 2010 to raise money, the audit showed, accounting for 4.97 trillion yuan, 60 percent of which governments have responsibility to repay. Some governments have offered illicit guarantees to such companies, while others rely on land sales to help them repay, Liu said.

'Time Bomb'

UBS AG estimated in a June 7 report that local government debt could be 30 percent of gross domestic product and may generate around 2 to 3 trillion yuan of non-performing loans. Credit Suisse AG economist Tao Dong said it was the biggest "time bomb" for China's economy.

"Overall it seems manageable but the real question: is anyone going to manage it?" said Vincent Chan, head of China research at Credit Suisse in Hong Kong. "Everyone wants to solve the problem on the condition that the other two parties pay the bill."

The audit showed 80 percent of local government debt was bank loans and 70 percent will mature in the next five years.

Qu Hongbin, a Hong Kong-based economist for HSBC Holdings Plc, said the biggest problem was transparency and the mismatch between maturities and projected revenue generation.

Maturity Mismatch

"Without real action going towards a restructuring of these debts, banks would face a real risk of defaulting in the coming years," he wrote in report today.

Governments from 12 provinces, 307 cities and 1,131 townships have pledged to use revenues from land sales to repay a combined outstanding debt of 2.55 trillion yuan. More than 35 billion yuan of money borrowed by local governments went into the stock and property markets or prohibited projects, the report showed. Five of China's commercial banks have issued 58 billion yuan of loans that violated loan rules, it said.

The yield on the government's 2.77 percent May 2012 bonds jumped 41 basis points, or 0.41 percentage point, this month to 3.43 percent, as the central bank tightened money supply to curb inflation. Twelve-month non-deliverable yuan forwards have dropped 0.7 percent in June to 6.4015 per dollar as of 4:30 p.m in Hong Kong.

The cost of five-year credit-default swaps protecting Chinese government bonds from default jumped 16 basis points this month to 89, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers. The contracts protect investors from losses when a company or government fails to pay its debt.

Municipal Sales

Liu proposed that the country study allowing provincial governments and some city authorities to sell an appropriate amount of debt. Government financing vehicles shouldn't keep borrowing money that local governments have responsibility to repay, he said. Separately today, the National Development and Reform Commission said it will speed up approvals for bond sales designed to fund affordable housing construction.

Many financing vehicles will have to pay interest and principal by year-end, said Liu Li-Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. If the local governments can't issue debt in the next three years, they would have to cut their combined fiscal spending by 5 percent to 7 percent of GDP to meet obligations, he said.

"If the central government can allow local governments to issue long-term debt, then the liquidity problem won't look very serious," he said. "I don't think this will necessarily run into a banking crisis in China given the balance sheet condition of the central government is very good at this stage."

The audit gave a number lower than the central bank, which said June 2 that more than 10,000 financing vehicles had been set up. The banking regulator has estimated local government financing vehicle debt at over 7.7 trillion yuan.

"It seems the government doesn't have a concrete idea what is a local government financing vehicle and what isn't," Credit Suisse's Chan said. "The biggest problem is it's very difficult to define in China what is private and what is public."

Canada's sliding stock market may not hit bottom for months as weakening economic growth and an unresolved debt crisis in Europe turn off more investors before a modest year-end rebound.

The majority of more than 20 strategists and fund managers polled by Reuters over the last two weeks expect the Toronto Stock Exchange's S&P/TSX composite index <.GSPTSE> to fall further from its close of 12,908.89 on Friday.

Many think it could slip another 5 to 10 percent between July and October, before a modest recovery begins later this year.

"The worries are not over, particularly with the concerns about when the euro zone and the IMF help provide Greece with its money," said Kate Warne, Canadian market strategist at Edward Jones.

"There are probably a few more glitches between today and the resolution of the current Greek debt crisis."

The St. Louis, Missouri-based strategist said other potential difficulties for the stock market include cooling economic growth in North America and China.

Canada's benchmark stock market index has fallen about 4 percent this year and 10 percent since the 2011 high reached in March.

Many market watchers see it tumbling to anywhere between 11,500 and 12,500. The index hasn't touched 11,500 since last August.

If the most pessimistic forecasts are right, this would mark a pullback of nearly 20 percent, a common definition of a bear market.

Douglas Rowat, senior equity specialist at HSBC Canada, said another 5 percent correction is certainly possible given the U.S. Federal Reserve's decision to end the second round of its quantitative easing program, in which it created money to buy U.S. government debt.

"That's largely been telegraphed to the market, but still, when it actually happens, you could see some volatility," he said.

An August speech by Fed Chairman Ben Bernanke at Jackson Hole, Wyoming, in which he flagged the launch of the stimulus program -- dubbed QE2 -- helped drive the TSX's turnaround from a 10 percent correction last year.

TECHNICAL SIGNALS WATCHED

The technical picture also points to further medium-term weakness, said Don Vialoux, a technical analyst at JovInvestment Management, who sees support at the November low around 12,500.

While second-quarter results in July are expected to be solid, he cautioned that the outlook from companies in the second half of the year tends to be less upbeat. Seasonal factors could also weigh this September and October -- typically bad months for stocks, said Vialoux.

Still, not everyone thinks Canadian stocks have much more to fall.

Ron Meisels, a technical analyst and president of Phases & Cycles in Montreal, thinks the TSX's seven-month low of 12,763.54, reached on June 20, will hold.

He said that, historically, the market has often bottomed on the Monday following the day options expire, in this case June 17.

The fact that more than 75 percent of stocks are trading below their 200-day moving average is in fact a bullish sign, said Meisels, indicating an oversold market.

Looking further out, Canadian stocks are widely expected to reverse year-to-date losses and eke out low single-digit returns in 2011, helped by a second-half pickup in economic growth and diminishing global headwinds.

Some analysts are speculating the U.S. Federal Reserve may even launch a third round of quantitative easing this year in a bid to further stimulate the economy, though Bernanke did not signal this at a recent appearance.

"In fact, it will be QE3," said Gavin Graham, president of Graham Investment Strategy. Until then, he expects more weakness, especially for resource stocks, which are particularly sensitive to global growth.

The energy and materials sectors have seen the steepest corrections from highs this year, skidding more than 15 percent. Yet many expect them to eventually lead the market higher.

The two sectors, which combined make up about half of the index, include resource giants like Suncor Energy and Potash Corp .

Financials, the most influential sector with nearly a 30 percent weighting on the TSX, have tumbled a more moderate 7 percent, and are also seen supporting a year-end recovery. The sector's biggest names include Royal Bank of Canada and Toronto-Dominion Bank .

Analysts said steeper declines in coming months would ultimately cheapen stocks and lure cash-heavy investors back into the market.

"While there is no shortage of headwinds, the selloff has been quite steep and has improved market valuations," said Elvis Picardo, a strategist with Global Securities in Vancouver.

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.

More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency.

UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.

The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.

“Right now there is great concern out there around the financial trajectory that the US is on,” said Larry Hatheway, chief economist at UBS.

The US currency has slid 5 per cent so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies.

Holders of large reserves, most notably China, have been diversifying away from the dollar. In the first four months of this year, three quarters of the $200bn expansion in China’s foreign exchange reserves was invested in non-US dollar assets, Standard Chartered estimates.The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers.

Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.

The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.

While equities did well today, commodities didn't. One commodity that had another rough day was silver. Below is a six-month chart of the heavily traded Silver Trust (SLV). After declining more than 2% today and 8% over the last four days, SLV is now below its closing low from mid-May. With this key support level broken, is silver about to take another leg down?